Plato Partnership at TradeTech 2018 – From Transaction Cost Analysis (TCA) to Best Execution Analysis (BXA) – how can you make the shift in light of MiFID II requirements?

Wednesday, 25thApril 2018. 1420 – 1455.

A rethink of best execution evaluation is needed considering MiFID II’s increased scrutiny over evidencing broker selection, and best execution no longer equates to a mere ‘look back and check’ on trading performance.

This panel discussion, featuring spokespeople from firms including LiquidMetrix, Liquidnet and HIS Markit, assessed how the shift from TCA to BXA manifested itself from a buy-side perspective, the effects of regulation and of upcoming technology trends.

Key Takeaways

The best execution processes are now being taken more seriously, as it’s about creating an environment where you must ask questions at the beginning of the order.

Some buy-side firms have adequately invested into BXA, though this does not constitute the majority of companies. There is a large amount of education still required.

Machine Learning and Artificial Intelligence are beginning to make impacts on best execution processes. Specifically, the future won’t have any more traders, but people involved in risk management.

Key Questions and Quotes

How is that shift to BXA manifested itself from the buy-side perspective?

“It’s the change of just one word – from ‘reasonable’ to ‘sufficient’.”

“The legislation says firms should adopt recommendations for improvement and feed those back into the cycle of activity. This implies a higher standard of compliance that the buy-side in general should adopt.”

How has the regulatory shift changed, and how has this affected you?

“You need to take this process of best execution seriously. This is no longer asking the question after the event – it’s creating an environment where you have to ask the question at the start of the order – and this develops best execution to your clients.”

“The analytics process has to have some pre-trade analytics to understand the costs – you cannot rationalise the event after it has taken place.”

Are you seeing this data coming into trading strategies?

“We see this data coming to the forefront on the sell side.”

“Now more than ever, we are having deeper conversations with clients. It’s not only performance – it’s not good enough to provide weighted average numbers. I need to look at the distribution of your performance, deviation etc.”

Is there enough investment?

“It’s still early stages. What we’re moving towards is much more scrutiny of the best execution process. The regulators are more interested in execution, with a whole level of detail underneath it.”

“There’s a whole education aspect to this. Now we have a level of transparency – how do we know we’re getting the correct price?”

“Some buy-side have invested adequately, but this is not the majority.”

We’ve been talking a lot about AI and ML – where is the innovation going to sit? Is it rhetoric?

“No, it’s real. The number of trading desks doing it indicates it’s going to get more and more important. In future, we will ask ‘why do you need the trader?’. In future, you won’t need a trader – he’ll manage risk.

We’ve been seeing this for years. There have been oscillating patterns – you’re just naturally going to have fragmentation which will lead to consolidation.

In the context of best execution analytics, what will we be talking about in TradeTech 2020.

“There are going to be a lot more changes. Informing new metrics and analytics around these changes across to other asset classes especially. We’ll have to assess lots of different benchmarks.”

“If you look at the direction of travel, you need to fill the technology gap. We’re going to have heavy investment into the intra-trade analytics.”